The GFC, the mining industry & economic policy
Doug Cameron
I come here with a healthy scepticism towards conventional, neo-classical or neo-liberal economics. I don't have any faith in the idea that markets are somehow self-correcting or self-regulating. I have no faith in the general proposition that free markets left to their own devices will bring about economic prosperity and general well-being. There are plenty of assertions that they do, but there is no hard evidence to support the proposition. The Global Financial Crisis didn't happen and the Mining Boom saved us!
The 'Great Recession' of 2008 is a glaring example of the failures and weaknesses of neo-liberal economic theory. Many economists and political commentators discuss this failure in detached, theoretical terms. Unfortunately many politicians do the same thing. This is leading us to compound our errors. We are creating from a failure of economics, a failure of politics.
It is unbelievable that some—mostly on the conservative side of politics and the press—have had the gall to describe the global financial crisis that led to the great recession as merely a North American crisis, or at worst a northern hemisphere crisis. That these are the same people who were dogmatically opposed to the fiscal stimulus that characterised Australia's response to the GFC is no coincidence. It is sophistry of the highest order to wave aside Australia's response to the GFC on the grounds that it was unnecessary because the GFC wasn't an Australian problem. And anyway, they say, we had a mining boom to help us through it. I shall deal with this claim shortly.
In conservative economic discourse within Australia, very little mention is made of the millions of workers who lost their jobs around the world as a result of the GFC; or the millions of workers who were forced into insecure work and poverty in countries such as Spain and Greece. This 'Great Recession' was caused by market failures, lack of government regulation and moral and financial failures in the banking and financial systems.
The challenges that faced the Rudd government between late 2008 and mid-2010 are well documented and I will not reiterate them in detail now except to note that private sector investment crashed, consumer demand collapsed, government revenues crashed and the cost of capital for Australian banks massively increased. It was this quadrella that required urgent government intervention to stave off what could have been a very serious recession. Government intervention—on Keynesian principles—underpinned 210,000 jobs, spared the Australian economy from recession and many families and communities from unemployment and long-term financial hardship. The government had learned the lesson from the 1991 recession, when Treasury and the Reserve Bank effectively sat on their hands while the economy fell in a hole. Faced with similar circumstances, the policy response was a fiscal stimulus which, in a phrase attributed to the former Treasury Secretary Ken Henry, was 'Go early, go hard and go households'. The Rudd government’s policy response to the GFC was described by Nobel economics laureate Joseph Stiglitz as, 'One of the most impressive economic policies I've seen, ever'.
I want to deal quickly with the myth propagated by the mining industry and the Coalition that the stimulus was unnecessary and the mining industry would have 'saved' Australia from the GFC in any event. The budget estimates process is useful for myth-busting. In May 2010, during budget estimates, I asked Ken Henry about the claims being made at the time that the mining industry was our economic saviour. Ken Henry had this to say: I have heard it said on a number of occasions, in fact I have lost count of the number of times I have heard people say, including senior commentators, that the mining industry saved Australia from recession or, even in less extreme versions of the statement that the mining industry contributed strongly to Australia avoiding a recession. These statements are not supported by the facts I would have to say. As Senators know, if one defines a recession as two consecutive quarters of negative growth then it is true that the Australian economy avoided a recession but the Australian mining industry actually experienced quite a deep recession on that calculation.
In the first six months of 2009, in the immediate aftermath of the shock waves occasioned by the collapse of Lehman Brothers, the Australian mining industry shed 15.2 per cent of its employees. Had every industry in Australia behaved in the same way, our unemployment rate would have increased from 4.6 per cent to 19 per cent in six months. Mining investment collapsed; mining output collapsed. So the Australian mining industry had quite a deep recession while the Australian economy did not have a recession. Suggestions that the Australian mining industry saved the Australian economy from recession are curious, to say the least.
Wayne Swan's former chief of staff, Chris Barrett, who is now Australia's Ambassador to the OECD, wrote a lengthy paper on Australia's fiscal response to the GFC ('Australia and the Great Recession'; April 2011). He concluded: Australia has been called the 'miracle' economy since well before this most recent crisis. While the performance has certainly been remarkable, the label is unhelpful. It suggests our strong economic performance is the product of chance alone; it excludes the important role good economic management has played in the last 20 years of Australian economic success. That some of the people making the claim that the mining industry 'saved us' were people who seem to be quite reputable economists leads me to the conclusion that some in the economics profession might be facing some quite serious challenges.
Very serious people
Paul Krugman in his book End This Depression Now speaks with a note of despair about what he believes is an ever-growing shortcoming of the economics profession, among others who like to offer economic advice. Krugman says: Politicians, public officials, and the broader class of writers and talkers who define conventional wisdom – have, for a variety of reasons, chosen to forget the lessons of history and the conclusions of several generations’ worth of economic analysis, replacing that hard-won knowledge with ideologically and politically convenient prejudices. Above all, conventional wisdom among what some of us have taken to referring to, sarcastically, as 'Very Serious People' has completely thrown away Keynes central dictum, 'The boom, not the slump, is the time for austerity'.
Nobel laureate Joseph Stiglitz in his recent book, The Price of Inequality, provides interesting insights into the economic and social issues that are shaping our world. He cites psychological research showing that individuals process information that is consistent with their prior beliefs differently from how the process information that is inconsistent. Information that is consistent with prior beliefs is remembered, seen as relevant, and reinforces beliefs. Information that is inconsistent with pre-existing beliefs is more likely to be ignored, discounted, or forgotten. This distortion is called 'confirmatory bias'.
Christina D. Romer, who was a member of President Obama's Council of Economic Advisors, put it this way in a 2011 paper entitled, 'What do we know about the effects of fiscal policy? Separating evidence from ideology'. On whether she had become cynical about the political process, she said: The one thing that has disillusioned me is the discussion of fiscal policy. Policy makers and far too many economists seem to be arguing from ideology rather than evidence. As I have described, the evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process. That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policy-making is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.
In Australia we have more than our fair share of Paul Krugman's 'very serious people' suffering from confirmatory bias and over-promotion of the conventional wisdom. We have senior public servants, political and economic journalists, politicians, business leaders and their lobbyists and some 'extremely serious people' from the Institute of Public Affairs. Unfortunately, some of these 'very serious people' are in positions of influence over economic policy and just as importantly, how economic policy is understood by the public at large.
I recently called for the abolition of the Productivity Commission following a speech given by its Chairman, Gary Banks in which he made a rather curious call for what he obliquely referred to as 'union activities' in the industrial relations system to be possibly subject to the anti-competitive conduct provisions of the Competition and Consumer Act. This extract from his speech gives a flavour of what he had to say:
Industrial relations regulation has generally been regarded as falling outside the purview of competition policy altogether and, secondary boycotts aside, union activities are largely exempt from the anti-competitive conduct provisions of the Competition and Consumer Act. The basis for this has been that labour markets are more complex than product markets and involve a significant human dimension. And these points are correct. But are they good reasons for foregoing scrutiny of whether the benefits of particular restrictions on competition and other regulatory measures in the labour market exceed the costs and, where they do, whether they are the best way of achieving those benefits?
You can read that passage over and over again and still it won't be clear what it means. Its meaning is almost completely opaque. Given that the principal function of trade unions is to act as agents for employees in collective bargaining negotiations, I can only assume that Mr. Banks thinks that this trade union function should be subject to the anti-competitive conduct provisions of the Competition and Consumer Act. Perhaps he would like to see the introduction of a modern day Combination Act to deal with all these anti-competitive workers combining to bargain collectively?
Business and the Coalition claim to have learned from their over-reach with WorkChoices. I don't believe so and the Productivity Commission is attempting to give them cover for further attacks on workers' rights. It is apparent that the low road to 'productivity reform' is intended to take the form of an indirect attack on wages and conditions via a more direct attack on collective bargaining and the legislative scheme for union organisation and recognition. What I suspect Mr. Banks' remarks really constitute is a carefully coded message to business and the Coalition that the Productivity Commission will assist in undermining collective bargaining in this country by providing some very dodgy economic rationale for it under the rubric of competition policy. If that isn't what he means then he should stop obfuscating and say clearly what he does mean when he says he wants to open up union activities to regulation under the Competition and Consumer Act.
In my view, the Productivity Commission should be abolished. Its culture is so firmly rooted in out-dated neo-liberal economics that it is hard to see it serving any further useful purpose by providing independent and innovative economic policy advice to government.
Clear economic thinking for building a good society
I want to talk about some priorities I think government should pursue in relation to taxation and future spending. These are priorities necessary to transform Australia into a truly good society. The business community and its Hayekian cheer squad in the economics profession loves 'small government'. As governments reduce their tax take as a proportion of GDP we are told that we should celebrate small government. What we should be doing is worrying about the consequences when GDP shrinks, as from time to time it inevitably does.
If we tie our ability to build a good society and help those who need it most to the delusion of unending growth, we are consigning the weakest in society to the risky bet that growth won't end. A shrinking proportion of a shrinking pie will hit the poor hardest while the privileged elite will continue to enjoy massive if slightly reduced wealth. It certainly won't make for a good society where the unemployed, single mums, the sick and disabled are faced with the daily grind of poverty and social exclusion.
With further economic uncertainty in Europe and the US, there are calls from the business and media elite here for more working class austerity. They also want to increase risk for the working class in the form of less secure employment. The Business Council wants more labour market deregulation and a smaller safety net. The big miners backed by their brains trust at the Institute of Public Affairs want the creation of a special economic zone in the north-west, unencumbered by labour and migration laws, taxation or any of the social obligations that come with doing business in a developed, civilised, democratic nation.
It is no coincidence that the same people responsible for normalising the ideas and policies that led to the global financial crisis and the longest and deepest US and European recessions in history are back doing exactly the same things they were doing before 2008; demanding smaller government, less regulation, less job and income security for workers and a lower social safety net.
Labor politicians have an obligation to oppose demands that will increase the gap between the rich and the poor and further entrench the power and privilege of the business elite. Even with the abolition of WorkChoices, Australia still doesn't meet its ILO Convention obligations on collective bargaining. This is something a Labor government needs to remedy. The government should face this challenge with the confidence that progressive politics is not something that is merely a marginal concern.
Progressive politics with the interests of working people at its core is mainstream politics. It is illegitimate for a progressive movement to respond to challenges from the right by pitching to the right. I believe we need a new social contract built on a stable, prosperous, broad-based economy; one with full employment, decent living wages and a social safety net second to none as its central tenets. It would offer an education system underpinned by world class public schools staffed by education professionals whose contribution to society's well-being is recognised and rewarded. It would offer affordable higher education and vocational training for any qualified applicant. It would be about creating fair and reasonable provision for disability, unemployment and retirement.
All of these things can be achieved through a combination of political will and a commitment to the values of inclusion and solidarity – not the corporate values of exclusion and individualism. Australia is the fifth lowest taxing country in the OECD with a Commonwealth tax to GDP ratio of 22 per cent forecast for 2012-13. In 2009 the ratio was 25.9 per cent for all levels of government and this is forecast to be 27 per cent in 2012-13. The OECD average is 33.8 per cent. The 2012-13 budget papers had this to say: Australia is one of the lowest taxing economies in the developed world. In 2009, Australia had the sixth lowest tax-to-GDP ratio out of 34 OECD countries. Australia’s tax-to-GDP ratio is also on par with developed economies in our region. The Government is committed to keeping tax as a share of GDP lower than the level it inherited in 2007 (23.7 per cent of GDP). When did it become wrong to raise sufficient tax revenue to ensure a good society? When did we start trading off decent aged care, a great education system for all, and care and compassion for those with a disability in return for the boast that we are one of the lowest taxing countries in the OECD? We must abandon this crazy test of our economic and fiscal virility and replace it with a tax system that will build a good society.
Take just three areas of important reform that are currently on the government's books that could see us becoming such a society if we ever get to implement them: Aged Care Reform – the Living Longer, Living Better aged care reform package; The National Disability Insurance Scheme; and the recommendations of the Gonski review of school funding.It isn't that these aren't good policies that dominate the public debate; it's whether we can afford to have them.
I say we can't afford not to have them. And it's not hard to afford them. It is true, there are some big numbers involved in these reforms. But we need to get them into some perspective. I have been arguing for some time that hypothecated taxes should be implemented to pay for Gonski, aged care reform and the NDIS. It makes me a little uncomfortable to know that I'm on the same page as the Queensland Premier on this when it comes to the NDIS, but I'll take all the friends I can get. I am serious about this issue, though I am not so sure that the Queensland Premier is. In dollar terms the combined cost of these three reforms comes to a little under $11.5 billion a year. It's a lot of money.
It is inconceivable that this amount of government expenditure on building a good society could be funded from existing revenue. There would not be enough public servants to sack; there would not be enough government programmes to cut without significantly affecting services to the public. But if taxes were raised for the specific purpose of paying for them, Australia's ratio of tax to GDP would increase by just 0.75 per cent. We would retain our virility ranking as the fifth lowest taxing country in the OECD and we would have a world class aged care system, a world class disability insurance system and a world class public education system. We would be a better educated, more productive, longer lived, healthier, fairer country. Australia would a very an even greater place to live.
I have said many times before that the government should not have a deficit fetish. We are facing some unique challenges including ensuring welfare recipients are not stigmatised and forced to rely on charity. Short-termism is a huge problem in Australia and I am concerned that there is very little debate as to what will happen when eventually there is a bust in the mining boom. Blind adherence to conventional wisdom as advocated by the 'very serious people' will undoubtedly lead to significant political and economic problems in the future.
There must be room for constructive criticism and critical analysis on a range of economic and social questions facing the country. Given the commitment to fiscal austerity by the Coalition, a clear and unequivocal political and economic differentiation should be taken to the next election. That is, Labor stands for building a good society and we will argue for a modest increase in tax to fund a better life for those with disabilities, our fellow Australians in aged care and we will ensure a fair and equitable opportunity for young Australians in all schools across the country.
All Australians, not just the mining magnates and the elite are entitled to live with dignity and security. I would hope that the economists among us might put aside their biases and ideologies and do what I believe they do best when they do their best work – cast an eye to history, look at the facts, consider the evidence and help us become a good society.
Hopefully the very serious people who enjoy extremely comfortable lives can bring themselves to understand the needs of the aged, the challenges and courage of our fellow Australians with disabilities, and the potential of the Gonski school initiatives.
Building a good society cannot be done on the cheap and I am convinced that with proper explanation to the public and courage from government we can deliver for those who need our help and support. Social justice demands no less. Thank you.
Doug Cameron was elected to the Australian Senate as a Labor member representing New South Wales at the 2007 federal election,This is the text of his speech to the Tasmanian Economics Society on 2 August 2002.
Suggested citation Cameron, Doug, 'Very serious people', Evatt Journal, Vol. 11, No. 1, August 2012<https://evatt.org.au/very-serious-people>
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